The regulatory regime continues to inform the advisory duty in mis-selling claims

The recent case of David Anderson v Openwork Limited[1] provides an opportunity to reflect on the current approach of the courts ...

… in relation to when a duty of care arises on giving financial advice, the content of that duty and the interrelationship between common law and financial regulation, which continues to be a central theme in mis-selling claims.

Background

Mr Anderson brought a claim against a financial adviser - a partner within the network of financial advisers working under the title of Openwork Limited - in respect of his purchase of an 'unsuitable' structured deposit (a 'Newcastle Guaranteed FTSE Bond').  Although the sale was not regulated under FSMA, the court applied the FSA's (now FCA's) Conduct of Business rules ('COB') by analogy and found that Openwork had breached a duty of care to Mr Anderson.  Mr Anderson was awarded damages of £5,459 plus interest at first instance in February 2015.

The Appeal

Openwork sought to appeal on three grounds: (i) no duty of care had arisen; (ii) if there was a duty of care then by applying the Conduct of Business rules ('COB') the Judge at first instance had applied the wrong standard; and (iii) there was no evidence on which the Judge could make a finding that there had been a breach of duty.

i. Did Openwork owe a duty of care?

Openwork relied heavily on the case of Green v The Royal Bank of Scotland,[2] the first interest rate swap mis-selling case to be brought before the courts since the FSA's announcement of its review into the sales of interest rate hedging products (IRHPs), and on which the Supreme Court refused permission to appeal in April 2014.   

In contrast to Anderson, the IRHP sold in Green fell within the remit of FSMA and the bank was deemed to be undertaking a regulated activity.  Accordingly, the claimants initially brought an action for the breach of COB rules under s150 (now s138D) FSMA 2000, alleging a breach of duty of care in respect of (i) the information provided by RBS, which amounted to negligent mis-statement and (ii) the advice relating to the suitability of the IRHP.  These two allegations are at the heart of a number of cases that have arisen from the 'financial crisis' in relation to the (alleged) mis-selling of interest rate swap agreements.

However, in Green, the s150 claim was statute barred under the Limitation Act and the claimants subsequently sought to bring a claim in negligence, arguing that a common law duty of care arose co-extensive to that imposed by statute.  The issue was therefore whether there existed a common law duty of care co-extensive with the obligations set out in COB.  Ultimately, in Green,the court decided that the bank had not 'crossed the line'into giving advice (it had merely given information and therefore a duty of care did not arise).

While subsequent cases have sought to argue that a limited duty of care does arise even when giving information rather than advice, Mr Anderson did not have to resort to this line of argument.  In Anderson the court found there was 'ample evidence' that: Openwork had advised Mr Anderson in the past, had made 'qualitative expressions' in relation to the IRHP, and had failed to make clear that it was not providing advice.  As a matter of fact, Openwork had advised Mr Anderson to purchase the bond and therefore a duty arose at common law in relation to that advice.  

ii. What was the standard of duty to be applied?

It was accepted that, because the bond was not regulated under FSMA, the FSA's COB rules did not apply directly.  Openwork argued that the Judge at first instance had, by applying the COB rules by analogy, misapplied Green and imposed a wider obligation on financial advisers than Parliament intended. 

However, the court dismissed this ground on the basis that consideration should be given to the standards imposed by the COB rules where it was found that the financial adviser had given advice and, in particular, the obligations to take reasonable steps to ensure that: (i) relevant information is provided to the customer; (ii) the product is suitable for the customer; and (iii) the customer understood the risks in the investment.

The court relied on paragraph 18 of the Court of Appeal decision in Green, as authority for the proposition that the starting point for determining the standard of duty should be in compliance with the rules of the regulatory regime.   The cases referred to included Loosemore v Financial Concepts,[3] Seymour v Ockwell[4] and Shore v Sedgwick Financial Services Limited[5], all of which relied on this proposition even prior to the onset of the 'financial crisis', after which it continued to be endorsed, for instance in the more recent case of Rubenstein v HSBC.[6]

As the court in Seymour put it:

'Whilst the duty of care owed by a financial adviser at common law is not necessarily co-extensive with the duties owed by that adviser under the applicable regulatory regime, the regulations afford strong evidence as to what is expected of a competent adviser in most situations' 

Similarly, the relevant obligations to 'know your client' and to ensure that a recommended product was suitable were considered 'basic' duties by the court in Anderson.  The court held that 'it would be a strange toothless duty of care if advice was given, yet these obligations excluded'.  According to the court, it was simply a matter of common sense that COB rules should be the starting point, notwithstanding the product was not regulated under FSMA.

iii.Was there a breach of duty?

The court went on to consider whether there had been a breach of the duties to 'know your client' and take reasonable steps to ensure the customer understood the nature of the risks involved.  Openwork relied on the fact that adequate documentation had been given to Mr Anderson; that it was a zero risk product because there was no risk to his capital; and that the Judge at first instance should not have relied on expert evidence which concluded that, had COB 5.4.3 applied directly, there would have been a breach by the adviser for failing to provide a comparison with the FTSE 100 performance against the rates achievable on high street bank deposits. 

However, as the appeal court agreed with decision at first instance that a duty of care had arisen and the content of that duty should be informed by COB 5.4.3, then it was correct to consider the meaning of 'risk' in this context by relying on the expert opinion provided.  The court found that if Mr Anderson had had the benefit of the expert's analysis, he would not have invested in the bond. But for the recommendation by Openwork, Mr Anderson would not have purchased the bond and suffered a loss of £5459 as a result of that recommendation. 

Openwork therefore lost the appeal on all three grounds.   

Comment

This case is unusual in that it has been decided in court, despite the sum claimed falling well within the Financial Ombudsman Service's maximum award limit of £150,000.  Claimants seeking amounts below that threshold from a regulated financial business will often be well advised to use the FOS, where the costs are low and the standard applied is a considerably more flexible assessment of what is fair, just and reasonable, rather than the strict legal test.

That said, whilst the Judge 'reject[ed] the suggestion that this case involves a major point of principle'he acknowledged that the facts of this case were 'unusual'in that the financial adviser had gone beyond simply providing information on the IRHP and had given his client advice in relation to an unregulated product. 

Nonetheless, this case reinforces the courts' view that, whilst the question of whether a duty of care exists is largely fact-dependent, there is a general consensus that once found, the scope of that duty should be determined by the regulatory framework.   

We can therefore expect the interrelationship between common law and financial regulation to continue to play a significant role in future mis-selling claims. Accordingly, traditional litigators need to be mindful of the impact of financial regulation when defending or bolstering such a claim.

[1] [2015] EW Misc B14 (18 June 2015) (Bailii) 

[2] [2013] EWCA Civ 1197

[3] [2001] Lloyd's Rep PN 235, 241

[4] [2005] PNLR 758

[5] [2007] EWHC 2059 (QB)

[6] [2011] EWHC 2304 (QB).